Dive Brief:

• An analysis this week finds that the U.S. real estate and construction industry is facing a new challenge created by the coronavirus crisis: a potential shutdown of the commercial lending and investment markets. While prior loan commitments are being honored, new loans are effectively not available to all but a few preferred customers, according to RCLCO Real Estate Advisors.
• RCLCO Director of Strategic Planning Charles Hewlett said that he is aware of deals that have fallen through due to concern about the near-term impact of the crisis, and he expects more to come. This is a change from the earlier weeks of the crisis, when the lending market appeared open for business and banks were holding firm with lower base rates and increased spreads, Hewlett said. Now, lenders and investors are reconsidering their offers and seeking to extend or cancel any investments in the pipeline.
• Looking at data from other countries including China and South Korea, Hewlett believes that a return to “normal” business and everyday life will begin in late May or early June. “If that is the trajectory, then I think there is a strong case for the U.S. being able to ramp back up relatively quickly,” he said.

Dive Insight:

The coronavirus has caused widespread uncertainty and panic among nearly all U.S. industries including construction, and many owners and lenders are putting projects on pause until the anxiety subsides. Government-mandated shutdowns in many areas have slowed or stopped projects as well.

Hewlett said that in the fast-moving situation, it’s impossible to track how many commercial construction project lending deals have been put on hold but it appears that projects underway are still being funded, with some renegotiation of terms.

“Until the economic turmoil brought on by the virus gets cleared up, the equities market will continue to swing wildly — and large real estate transactions will be challenging to consummate,” Hewlett said.

Other analysts have come to the same dire conclusion. Tom Barrack, CEO of Colony Capital, told The Real Deal this week that he foresees a collapse of commercial real estate lending. 

The types of commercial construction most at risk in this lending environment are hospitality, retail and entertainment while healthcare construction and healthcare-related manufacturing projects could see more activity. New analysis from Fitch Ratings found a growing number of commercial real estate borrowers requesting debt relief in recent weeks. In particular, hotel-secured transactions comprised about 47% of the asks for relief and 30% stemmed from deals backed by retail assets, according to The Real Deal. 

Nevertheless, demand for distribution and warehouse space may likely increase as U.S. companies favor higher inventory levels and emphasize supply chain resiliency over efficiency, Hewlett said. Market reports have calculated that a 5% increase in total business inventories would translate into the need for an additional 500 million to 700 million square feet of industrial space.

“In the long run, expect more manufacturing facilities to locate in North America to ensure supply and access to markets during episodes like this one, a boon to economic growth and industrial and logistics facilities in the U.S. And Mexico,” he said.

Hewlett said RCLCO advisors are predicting that the impact on commercial lending will be short, more like after the terrorist attacks of 9/11 than the Great Recession. "The good news is that real estate did not precipitate this crisis, and with a restoration of normal consumption and rapid rebuilding of the supply chain, the fundamental underpinnings of the economy and credit markets are still sound,” he said.